Without question, 2018 has been the biggest year yet for the little blog we decided to produce once a month in the summer of 2016 here at Raich Ende Malter. The Tax Cuts and Jobs Act gave us more material to write about than we could ever hope to cover in a bimonthly column, so we went weekly. Now we’re posting twice a week—one serious original tax piece, usually on Tuesday, and a Friday tax news roundup featuring REM Randy, pictured above (hi, Randy!). It’s a significant change in format and frequency, and a far cry from the occasional thought piece in our original vision.

This year, we’ve seen more new contributors, with content covering areas we haven’t touched on before. It’s all been incredibly exciting, and we’re currently hard at work on a new REM Cycle project. It should be arriving in your inboxes sometime next month. We think you’re going to like it.

But enough talk. Happy holidays, happy new year, and thank you for reading. See you in 2019.

We are excited to announce a change in the REM Cycle schedule. Beginning this week, our regular news roundup “Wake Up With REM” will appear on Fridays, recapping the important news events of the previous seven days. You can still look forward to fresh, relatable content every Tuesday, with everything from timely tax topics to deep dives into case studies.

After a three-month marathon session, many accountants breathe a sigh of relief at midnight on October 15. Once the realization sets in that the extended filing due date has passed, now what? Time to deflate and recharge is essential! The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Tuesday, October 16, 2018.

It’s been a year since the Equifax data breach, impacting 147 million Americans and widely considered to be the largest consumer data breach in U.S. history. Because Equifax didn’t use strong, consistent encryption methods to protect the data they stored, hackers were able to locate and exploit a known bug in the Equifax framework to steal this information. Data breaches aren’t uncommon; several national corporations, including Home Depot and Target, have been hacked in recent years. There isn’t much we can do as individuals to control how these large companies and institutions protect our financial and personal data, but we can take steps to guard against breaches at home. Specifically, we’re going to look at phishing scams and how to avoid being tricked.

Phishing is a form of cyber attack in which the hacker tries to obtain your information by tricking you into disclosing it yourself. They can do this by contacting you in any of several different ways:

Email (both work and personal)

Text

Social media (Facebook Messenger, Instagram, Twitter, LinkedIn, etc.)

Phone

Via email: A phishing email works in one of two ways: convincing you either to disclose your sensitive information or to click on a link or attachment that contains malware. SPOILER ALERT: Your bank/credit card company will never email you to verify your password or account information. Neither will Amazon, eBay, Apple, Microsoft, the IRS, or pretty much any other institution. They will not send you attachments, so don’t click on any.

Via text: Gmail, Hotmail, and Yahoo never ask if you don’t want to do something with your account. If you receive a text asking you about a password reset on your account and you didn’t request to reset the password, ignore the text. Don’t even reply—that will only let the scammers know they reached a working cell phone number so they can try again.

Via social media: There have been reports of Facebook users receiving messages from their contacts that consist of an .SVG image file that looks like a photo. Clicking on the file redirected the users to a fake YouTube page with prompts to add “browser extensions” in order to view the video. When users clicked the prompts, they inadvertently installed malware on their computers that allowed the scammers access to all the users’ Facebook friends. Similar scams have appeared on Instagram, Twitter, and LinkedIn. There are other social media phishing attempts out there, but this is the current big one.

Via phone: If you get a call from Microsoft, the IRS, China, etc.—you’re not getting a legitimate call. Hang up and, if you can, block the number.

Also: Attacks have been reported on Venmo and PayPal digital payment accounts. In the most common attack, the user (you) receives a legitimate-looking text or email that claims there’s been suspicious activity on their account and directs the user to provide updated information to avoid fraudulent charges. Another popular method does essentially the same thing but tells the user “Your payment could not be completed,” and prompts the user to provide the information. Pretty sneaky, right?

Be paranoid. Never login to any website you reach by clicking a link in an email. Even if it looks authentic. Even if it doesn’t look like a link—for instance, a button in the email that says, “Verify information now.” The button is a link and clicking it will not end well for your security.

Lessons to live by

Do not trust the link.

No legitimate request for your username/password will come through an unsolicited email or text.

If you’re not expecting an email and you know the sender: call or text them. If you don’t have their number, use a different email or messaging program to ask them if they really sent it. Do not reply to the email.

If you’re not expecting it and you don’t know the sender: delete it. Better safe than sorry.

Awareness is key. Scammers are shrewd, but you don’t have to be tech-savvy to outwit them.

Owners of certain flow-through entities may qualify for reduced tax rates on qualified business income earned by the entities via the newly enacted Section 199A, part of the Tax Cuts and Jobs Act (TCJA). If you operate as an S Corp, you may be able to take better advantage of these reduced tax rates simply by reviewing the compensation structure of payments to owners. This planning technique must be considered during 2018 and will be relevant as long as Section 199A remains in effect (this provision sunsets in 2026).

Simply put

Section 199A allows for a 20% reduction in pass-through income to certain qualified shareholders (see below). This is an easy way to save money. Simply put, reducing the salary of owners will increase the net income flowing through to the shareholders, thereby lowering the tax rate; for example, if you are currently paying the top rate of 37%, you may qualify for a reduction of that percentage by 20%, resulting in a tax rate of only 29.6%. Furthermore, the profits may not be subject to Medicare tax, resulting in an additional 2.9% savings. As in the past, shareholders should be paid “reasonable compensation,” but this concept is not specifically defined. Your trusted advisor should be able to determine whether you are in the lowest end of the reasonable compensation range in order to achieve the maximum tax benefit. Of course, most people do not want to take home less money, but this can be solved by paying the reduction in salary as S Corp distributions, taking care to ensure that appropriate estimates are paid so that underpayment penalties are not incurred.

Example: A small distributor where the owner historically receives a $400,000 salary that results in $100,000 net corporate income. Without any planning, the owner will pay tax on the salary at normal rates but will receive a 20% reduction in the $100,000 corporate income, resulting in tax being paid on $480,000 ($400,000 salary plus 80% of $100,000). With careful planning, we can reduce the salary to a reasonable $200,000, resulting in a net corporate income of $300,000. The owner now pays tax on $440,000 ($200,000 salary plus 80% of $300,000). This is a significant tax savings.

Now the details

For 2018, if the owner’s taxable income is less than the threshold amount ($315,000 for married filing jointly and $157,500 for other individuals), there are very few limitations.

However, two major limitations will be phased in once taxable income exceeds the threshold amounts, and will be fully applicable once taxable income is above $415,000 for married filing jointly and $207,500 for other individuals. Specifically:

the deduction will not apply to “specified businesses,” e.g., doctors, lawyers, brokers, accountants, etc. (Architects and engineers are exempt from this limitation because they have better lobbyists); and

the 20% reduction will be limited to 50% of W-2 wages (or in the alternative 25% of W-2 wages plus 2.5% of certain property and equipment cost). So, in certain situations, it may actually be beneficial to increase wages.

The takeaway

There are many nuances and uncertainties regarding the application of Section 199A. And while the Treasury will eventually be issuing guidance, diligent business owners and their trusted tax professionals need to become familiar with them now. Speak to your advisor sooner than later to discuss an optimal compensation target for 2018.

After a three-month marathon session of tax work, many tax accountants will be breathing a sigh of relief at midnight on April 17. Once the realization sets in that the due date has passed and they are unburdened from the intense weight of that deadline, now what? Time to deflate and recharge is essential to anyone that has just gone through such a gauntlet. The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Wednesday, April 18, 2018.

Some of the fill-in responses were great, but didn't receive enough votes to make it onto the chart. Honorable mentions include:

A new year has arrived. It’s time to swap out our desk calendars and lie to ourselves about how healthy and disciplined we are going to be over the next 12 months. Time to start fresh and get off on the right foot. Who cares if you had to call out sick the entire first week of the year to take care of your sniffling kids (true story)?

There are many significant changes that could impact you in 2018 and going forward. The only way you will be able to use those changes to your advantage is if you understand them and take appropriate action.

In honor of the New Year, we here at the REM Cycle have gathered together some things you should be considering over the first few months of 2018:

Try to understand how the new federal tax law impacts you and/or your business and take action to best position yourself for 2018 and the future.

If you are a sole proprietor or have pass-through income: talk to an advisor who understands the new 20% business income deduction about how you can maximize your benefit

If you are an estimated taxpayer: don’t just pay the same amounts you paid for 2017. It is possible that your tax burden will be drastically different in 2018; consult your tax advisor

Consider paying down your home equity line; you will no longer get an itemized deduction for the interest paid

If you have net operating losses, you need to understand the limitation – you might be paying taxes in spite of them

Leveraged business taxpayers with gross receipts in excess of $25M need to understand the interest expense deduction limitation and strongly consider different financing strategies

Remember to get your 2017 tax information to your preparer as soon as reasonably possible. Your due date for partnership and S-corporation returns is 3/15/18 and for individual returns is 4/17/18, before extensions. Maybe you won’t have to go on extension this year!

It is cold, it is dark, but we have an opportunity to set ourselves up for a bright 2018 if we act now. Don’t hesitate to reach out to your tax preparer or advisor to talk about the above. You will be happy you did.

There will be angry emails; there will be heated telephone discussions. Fingers will be pointed and harsh words will be uttered. I’m not talking about holiday shopping, but rather penalties on the Employer Shared Responsibility Payment (ESRP).

Early this month, the IRS announced that enforcement of the ESRP penalties would begin in late 2017. And so it has begun. As a mandate of the Affordable Care Act (Obamacare), Applicable Large Employers (ALEs) must provide minimum essential health insurance coverage (MEC) for their employees or pay what is essentially a penalty. This is referred to as the “Play or Pay” mandate. There is some nuance to the definitions of ALE, MEC, and everything else having to do with Obamacare, but ALEs are those employers with 50 or more full-time employees (in 2015 that threshold is 100) and MEC is affordable and sufficient health insurance. These are more specifically defined in the related code sections; go have a read.

In addition, reporting of coverage is required on the 1094 and 1095 series of forms. These forms let the employee and the IRS know what coverage was offered and for which months. In the event that the employer does not “Play” in a given month, they must “Pay”.

There are two flavors of ESRP that may apply if: a) minimum essential coverage is not offered to most employees and any employee applies for and receives a premium tax credit to pay for insurance; b) minimum essential coverage is offered to most employees but it is either too expensive or wasn’t of minimum value. The percent of employees defined as “most” increases from 70% to 95% from 2015 to 2017 and the prices and value are indexed each year. Only one of the two types of ESRP can apply to a given month, not both.

The intention of the Play or Pay mandate is to compel employers to become part of the insurance pool, but bad planning and/or unintentional errors can have drastic consequences.

You see, the rub here is that the penalty is calculated based on ALL employees of the company for any month in which at least one employee falls under a situation described in “a” or “b” above. In 2015, the penalties for “a” and “b” are $173 and $260 per month, respectively. In the event that you have, say, 130 full-time equivalent employees and have only one employee that falls under the “a” penalty variety for every month of the year, you may be on the hook for more than $200k. Let that sink in a moment. Two. Hundred. Thousand.

“Yikes. I just received such a notice and I only have 30 days to respond! They are proposing an ESRP of over $100k! This looks really bad. What should I do?”

As the Hitchhiker's Guide advises: Don’t Panic! Forward the notice you received to your accountant or trusted advisor. If you respond within the 30-day window, you can secure an extension of time to digest and fully respond to the information contained in the notice. In absence of a response, the IRS may issue a notice and demand for payment and proceed with their routine methods of collecting that payment. Don’t let that happen.

One year ago today, we uploaded our first post. The rest, as they say, is history. Here's the future: we have lots of new articles planned for you, as well as expert guest posts, infographics, and more.